Impacts of Alternative Emissions Allowance Allocation Methods Under a Federal Cap-and-Trade Program

Michael Dworsky (), Lawrence Goulder () and Marc Hafstead
Additional contact information
Michael Dworsky: Brookings Institution
Lawrence Goulder: Stanford Environmental and Energy Policy Analysis Center, Stanford University

No 08-048, Discussion Papers from Stanford Institute for Economic Policy Research

Abstract: This paper employs a dynamic general equilibrium model of the U.S. economy to address the federal cap-and-trap issue. The model’s unique treatment of capital dynamics permits close attention to the impacts of alternative policies on industry profits. We find that freely allocating a relatively small fraction of the emissions allowances generally suffices to prevent profit losses among the eight industries that, without free allowances or other compensation, would suffer the largest percentage losses of profit. Under a wide range of cap-and-trade designs, freely allocating less than 15 percent of the total allowances prevents profit losses to these most vulnerable industries. Allocating 100 percent of the allowances substantially overcompensates these industries, in many cases causing more than a doubling of profits. These results indicate that profit preservation is consistent with substantial use of auctioning and the generation of considerable auction revenue. GDP costs of cap and trade depend critically on how such revenues are used. When these revenues are employed to finance cuts in marginal income tax rates, the resulting GDP costs are about 33 percent lower. On the other hand, when the auction proceeds are returned to the economy in lump-sum fashion, the potential costadvantages of auctioning are not realized.

Keywords: cap-and-trade; environmental legislation; greenhouse gas emissions (search for similar items in EconPapers)
Date: 2009-08
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Impacts of alternative emissions allowance allocation methods under a federal cap-and-trade program (2010)
Working Paper: Impacts of Alternative Emissions Allowance Allocation Methods under a Federal Cap-and-Trade Program (2009)
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